December 18th, 2019 8:17 AM by Jackie A. Graves, President
Planning and Research can alleviate some of
the sticker shock on closing costs.
CLOSING COSTS ARE EASY to overlook when
you're buying your first home, as you're probably most concerned about the
house purchase price, your down payment and the mortgage interest rate. But
it's a mistake to forget about closing costs, a sometimes-mysterious mix of
fees, charges and advance payments that, if not handled well, can make closing
day a scramble.
Here are some tips on how to plan ahead for closing costs.
Closing costs are fees and expenses that allow you to finalize a home purchase,
including mortgage-related fees, property title insurance and taxes.
Within three days after you file a mortgage application, you
will receive an estimate of closing costs, says Ron Haynie, senior vice
president of mortgage finance policy for the Independent Community Bankers of
"On that loan estimate, it should detail exactly the
purchase price of the home, amount of the mortgage, interest rate" as well
as the estimated closing costs, Haynie says.
The closing costs will be listed on the form as an exact amount
or estimated range. Here is a sample of the form.
As you stay in communication with your lender leading up to the
closing, you'll find out if any of the anticipated costs change. Then, a few
days before the closing date, you'll get a closing disclosure that will
confirm the fees you will pay. All of the payments on that form will be due at
closing, so it's vitally important that you prepare to cover the closing costs,
which will likely come out of your down payment.
Your closing costs will vary based on several factors, such as
the size of the home, the down payment amount, type of loan you choose and what
you're able to negotiate with the seller.
Generally, closing costs run between 2% and 5% of the price of
your home, which could be up to $10,000 for a $200,000 home. The average for a
single-family property in 2018 was $5,779 including taxes and $3,344 without
taxes, according to a 2019 survey
by ClosingCorp, a real estate data firm. Costs can also vary by state.
According to the survey, the highest-cost states were New York ($13,581) and
Delaware ($13,309), while the lowest were Missouri ($1,887) and Indiana
Here is a look at some of the most common closing-related costs.
Some are paid days or weeks before the closing date, but many are settled on
the day of closing.
Earnest money. While it's not technically a closing cost, buyers need to
provide what's known as earnest money after they
sign the home purchase contract. The money is a show of good faith toward the
seller and could be as much as 1% to 5% of the purchase price. The money can be
used toward closing costs or your down payment.
Appraisal. The appraisal is required to make sure the home sale price
is justified. "That is pretty much a flat fee that can range around $450
to $550 depending on the size of the transaction," says Tom Parrish, vice
president, head of retail lending product management at BMO Harris Bank.
"It can be more if it's a larger home." The fee is usually paid when
the appraisal is performed but is sometimes paid at closing.
Home inspection. Buyers will want to be sure a home has no major structural
defects before purchase. The cost could be up to $500 or higher, often
depending on the size of the house. Pest and radon inspections may be needed,
too. Like with the appraisal, you'll usually pay this fee when the home is
inspected, but it's sometimes paid when you close.
Points. If you choose to – or have to – pay points as part of your
loan, they are charged as 1% of the loan. Paying a point at closing can help
you get a lower interest rate, or you can choose to get the points money given
back to you and use it toward closing costs.
Credit report fees. The lender will want to check the credit of the person –
or people – buying the home, which could cost around $25.
Flood determination. A lender has to determine if a property is in a flood
zone, and the fee is nominal – likely under $10, Parrish says.
Tax monitoring services. This ensures property taxes have
been paid throughout the life of the home and could cost $50 to $75.
Title-related costs. The lender will conduct a title search and also take out
title insurance to make sure there are no complications. The homebuyer is
encouraged to take out insurance as well. A title search fee varies based on
location and vendor but is usually around $200. Title insurance about 0.5% of
the home's value.
Government taxes and fees. Counties can charge a recording
fee, and states, counties and even municipalities can add transfer taxes, which
could increase your total costs. Although sellers often pay these, there might
be a chance you'll have to chip in.
Homeowners association fees. A homeowners association for a
townhouse or condominium development might tack on a transfer fee that could be
paid by a seller, buyer or both.
Document and processing fees. These fees are often called
origination fees and can include loan application processing, underwriting and
other services. Costs can vary by financial institution.
Attorney fees. A buyer may want to have representation throughout the
process, as well as at closing. Fees could be a few hundred to several hundred
Home insurance. Whether you're putting your home insurance payment in
escrow or not, lenders usually require the buyer to pay for the first year at
Mortgage insurance: If needed, you could pay the first year's mortgage
insurance all at once at closing or have it paid out in escrow.
Property taxes. You'll likely have to pay off taxes for the rest of the
year or at least the next six months. This could cost thousands of dollars if
you close in June or July and taxes are due in December, Parrish says.
The closing cost estimate you receive right after you apply for
your mortgage should be very similar to what you end up paying at closing. But
you could run into a few surprises along the way.
"It's a very dynamic process, and there are a lot of moving
parts" between the application and closing, such as the appraisal and home
inspection, Haynie says.
Haynie cites a few examples:
Lenders are allowed to change closing costs if there is a change
in circumstances, such as sales price. Some fees, such as ones for the lender
and transfer taxes, cannot increase.
Negotiation and comparison shopping can help reduce – or even
eliminate – some closing costs for first-time homebuyers.
Negotiation. Negotiating with the seller is "one way to minimize
the impact of closing costs on first-time buyers," Haynie says.
If buyers know they're going to have trouble picking up the
closing costs along with an adequate down payment, it's worth it to try to
negotiate a deal with the seller.
"But there's no free lunch," Haynie says. "The
property seller is not going to agree to a really low sales price far below
asking price" and then pay all the closing costs.
Comparison shopping. As you research the best offers from banks, credit unions
and mortgage lenders for your loan, make sure to find out if you can get a deal
on closing costs.
For example, you might get a discount if you work with a
mortgage broker connected to your real estate agent. Or a bank or credit union
might be offering a deal on closing costs. It's a good idea to focus on the
document- and processing-related fees from lenders and see if all of them are
justified. Also, you could try to shop around for the best deal on your title
insurance – just make sure you allow enough time to find the right one.
When first-time homebuyers budget for a down payment, they need
to account for closing costs as well as how much money they'll need to keep up
"You don't want to walk into a house and have zero in your
savings account" because everything was spent in buying the house, Parrish
A 20% down payment is often considered ideal for a home purchase
because it eliminates the need for mortgage
insurance payments. But it's difficult for many first-time
homebuyers to come up with that much money for the down payment, plus handle
all the closing costs, Haynie says. In that case, he says it's OK to have less
than 20% down and pay some mortgage insurance for a while.
It's ideal for homeowners to reserve two to three months' worth
of their regular monthly payments when they move into a home, Haynie says.
Parrish recommends saving 1% of the value of the home each year to pay for
"You have ongoing maintenance and costs that a lot of folks
don't realize," Parrish says.
There are many programs throughout the country offered by
government agencies and nonprofits that are designed to help first-time
homebuyers, especially those with low and moderate incomes.
Financial institutions are often aware of these programs and
will incorporate them into their discussions with you when you line up your
financing. Lenders will try to understand homebuyers' budgets, what they can
afford and whether they qualify for assistance programs, Parrish says.
Assistance could come in different forms:
If you give yourself enough time – about six months ahead or
more, Haynie says – you can find the resources you need and make sure your
credit is strong enough to make it work. Meet with a lender and also with a
housing counselor at a local nonprofit that is designed to help prospective
"You have to take everything into consideration before you
go shopping," Parrish says.
After all of your planning, you might still come up short.
That's when you might need to get help from a parent or relative to cover the
shortfall, which you can disclose in a gift letter. A 2019
report from the National Association of Realtors found that 28%
of homebuyers 28 and younger had help with their down payment from a friend or
relative, as well as 21% of buyers between 29 and 38.
"These are things you need to have lined up and have a
strategy on how you're going to do this," Haynie says. "It's not
something where you can wake up Saturday morning and say you want to buy a
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